K&K GLOBAL CONSULTING RESEARCH
25th May 2017, at the time we write this article, the second phase of the FX Global Code of Conduct ("Global Code") has just been published by the newly established Global Foreign Exchange Committee (“GFXC”). With a tight deadline sending the Buy-side Principles issue 9 for print on the same day, we extracted the following new principles under the "Execution" section for you. The bullets below outlines the headings for the additional principles in the Global Code with the exception of the highly anticipated principle 17 about "Last Look" where we included all the details. Read all the details about phase two of the Global Code in the following URL: http://www.globalfxc.org/docs/fx_global.pdf
Additional two new roles and principles are specified under:
PRINCIPLE 9 Market Participants should handle orders fairly and with transparency in line with the capacities in which they act.
• Market Participants operating FX E-Trading Platforms
• Market Participants acting as Interdealer Brokers (IDBs)
PRINCIPLE 13 Market Participants should understand how reference prices, including highs and lows, are established in connection with their transactions and/or orders.
PRINCIPLE 15 Market Participants should identify and resolve trade discrepancies as soon as practicable to contribute to a well-functioning FX Market.
PRINCIPLE 16 Market Participants acting as Voice Brokers should only employ name switching where there is insufficient credit between parties to the transaction.
PRINCIPLE 17 Market Participants employing last look should be transparent regarding its use and provide appropriate disclosures to Clients.
Last look is a practice utilised in Electronic Trading Activities whereby a Market Participant receiving a trade request has a final opportunity to accept or reject the request against its quoted price. Market Participants receiving trade requests that utilise the last look window should have in place governance and controls around its design and use, consistent with disclosed terms. This may include appropriate management and compliance oversight.
A Market Participant should be transparent regarding its last look practices in order for the Client to understand and to be able to make an informed decision as to the manner in which last look is applied to their trading. The Market Participant should disclose,
at a minimum, explanations regarding whether, and if so how, changes to price in either direction may impact the decision to accept or reject the trade, the expected or typical period of time for making that decision, and more broadly the purpose for using last look.
If utilised, last look should be a risk control mechanism used in order to verify validity and/or price. The validity check should be intended to confirm that the transaction details contained in the request to trade are appropriate from an operational perspective and there is sufficient available credit to enter into the transaction contemplated by the trade request. The price check should be intended to confirm whether the price at which the trade request was made remains consistent with the current price that would be available to the Client.
In the context of last look, the Market Participant has sole discretion, based upon the validity and price check processes, over whether the Client’s trade request is accepted or not, leaving the Client with potential market risk in the event the trade request is not accepted. Accordingly, and consistent with related principles in the Global Code:
• Last look should not be used for purposes of information gathering with no intention to accept the Client’s request to trade.
• Confidential Information arises at the point the Market Participant receives a trade request at the start of the last look window, and use of such Confidential Information should be consistent with Principles 19 and 20 on Information Sharing.
• During the last look window, trading activity that utilises the information from the Client’s trade request, including any related hedging activity, is likely inconsistent with good market practice because it may signal to other Market Participants the Client’s trading intent, skewing market prices against the Client, which (1) is not likely to benefit the Client, and (2) in the event that the Market Participant rejects the Client’s request to trade, constitutes use of Confidential Information in a manner not specified by the Client.
It is good practice for Market Participants to be available to engage in a dialogue with Clients regarding how their trade requests have been handled, including the appropriate treatment of information associated with those orders. Such dialogue could include metrics that facilitate transparency around the pricing and execution of the Client’s trade requests and assist a Client in evaluating the handling of its trade requests in order to evaluate whether the execution methodology continues to meet its needs over time.